The ability for an individual to fully grasp the concept of investing in the oil and gas industry is a critical element of managing ones investment portfolio.
The oil market can be a daunting investment vehicle for both experts and private investors, in view of erratic price movements which can happen on a daily basis. It is important to be wary of this market and not just dive in and make picks, rather proper assessment of a firm’s current status should be employed in determining its future worth.
Size is Key
It is disastrous to approach the oil and gas industry haphazardly as “Nobody has it all figured out” and as such size of the company and its sector is paramount. This is a breakdown of the size of companies:
– Nano cap: These are firms that carry greatest risk and have market caps that stands below $50 million.
– Micro cap: These are firms whose stocks cost pennies and can be quite volatile. There market cap is usually around $50 and $300 million.
– Small cap: They represent companies with huge growth opportunity, with market cap ranging between $300 million and $2 billion, which remains in the speculative range.
– Mid cap: Just like small caps, mid caps offer huge growth potential for investors and these stocks own a market cap that ranges between $2 billion and just below $10 billion.
– Large cap: Stocks in this category come with little or no risk and offer greater stability than smaller companies. Stocks here own market cap that range between $10 billion and $200 billion or more, placing these caps at the other end of the risk spectrum.
However, it is anticipated that small growth stocks usher in better returns than stocks with larger market cap, but this is not always true. In view of this, we saw some of the stocks that delivered on returns last year come from large cap stocks in the refining industry.
Starting off in the oil and gas industry required you making a checklist to see if all’s right with your investment picks. This will evidently save you a lot of time down the road and help you carry out due diligence.
– Location: Location is one thing that you should consider when investing on stocks in the oil and gas industry. A company’s share price could be hurt if one of its operational offices is located in a volatile region i.e. if Mobil’s operation is hampered in Nigeria, then there’s a possibility that its shares could plummet.
– Growth trends: Due diligence should be carried to ascertain the company’s revenues base in the previous year. Are there expectations of the company meeting future revenue outlook, as well as earnings in the next four quarters?
– Fund inflow problems: Ascertain the company’s current and future funding needs, and the possibility of cash inflow diluting the stock.
– Yield: A number of companies in the oil and gas industry offer secure yearly dividend payout to shareholders. It is expedient to consider if a company has increased, lowered, or even kept on hold its dividend within the last five year.
The oil and gas industry offers a variety of options for willing investors. It does have something for almost anyone, spanning from indirect exposure via an energy-linked stock to more direct investment in commodity-associated ETF.
The best introduction you can give yourself is to carry out the needed research or get in touch with an expert before betting your funds on any stock.